Economic fundamentalism and the minimum wage

I’ve been remiss in replying to this post by Megan McArdle, but today I’ve finally gotten around to it. This will be a really long post, so don’t say I didn’t warn ya.

McArdle basically argues two things: that 1) the minimum wage has a disemployment effect, and 2) that monopsony is not a persuasive model for the labor market (or at least for the low-wage retail sector). First I’ll deal with the evidence on the minimum wage. McArdle mentions the famous 1994 Alan Krueger and David Card study which looked at the impact of a 1992 increase in the minimum wage on employment in fast food establishments in New Jersey. Krueger and Card found that in that case, contrary to what standard theory predicts, the increase in the minimum wage did not decrease employment.

Very reasonable criticisms of that study have been made. McArdle summarizes:

The original study was a phone study; when another study asked for actual payroll records, they found the same result the standard model would predict: fast food employment dropped in New Jersey. Additionally, as Kevin Murphy has pointed out, the survey started long after employers knew that a minimum wage hike was coming—he compares it to assessing a midnight curfew by comparing the number of teenagers on the street at 11:59 to the number on the street at 12:30.

In response, Krueger and Card did another study that looked at the impact of that same minimum wage increase on employment in fast food establishments in New Jersey. To counter the previous criticisms from economists like Kevin Murphy who said that their data was problematic and that they’d got the timing wrong, this time they used a more reliable data source (employer data from the Bureau of Labor Statistics) and looked at the data over a longer time period. And guess what? This new analysis confirmed their original findings: the increase in the minimum wage did not lead to a decrease in employment.

There are a number of other reliable scholarly studies on the minimum wage that report similar results—such as this one, this one, this one, this one, and this one, for example. There are also quite a few very good studies that show the opposite—that an increase in the minimum wage does indeed bring about a decrease in employment. A fair characterization of the literature is that the minimum wage’s impact on employment is ambiguous. But the fact that the findings are mixed is fairly compelling evidence that there must be something wrong with the standard perfect competition model of employment. And that’s because the textbook perfect competition model predicts that an increase in the minimum wage will always and everywhere lead to a decrease in employment, no ifs, ands, or buts about it.

Another thing that must be pointed out: given the anti-regulation ideological bias of the economics profession as a whole, it’s not hard to imagine that studies that do find that the minimum wage has a disemployment effect are considerably more likely to be published. I’m not accusing anyone of scholarly fraud here. But the fact is, there are lots of different datasets you can use, lots of models to go with, lots of variables to include or leave out, and lots of ways to slice and dice the data. It’s not unheard of for researchers to opportunistically try different models and methodologies until they hit upon one that gives them the results they want.

Here is what economist Edward Glaeser had to say in a recent paper about researcher incentives and empirical methods:

Economists are quick to assume opportunistic behavior in almost every walk of life other than our own. Our empirical methods are based on assumptions of human behavior that would not pass muster in any of our models. The solution to this problem is not to expect a mass renunciation of data mining, selective data cleaning or opportunistic methodology selection, but rather to follow Leamer’s lead in designing and using techniques that anticipate the behavior of optimizing researchers.

Indeed, Krueger and Card have written a paper that provides strong evidence that “specification searching and publication bias” have led to an overrepresentation of studies that find that the minimum wage has a statistically significant disemployment effect. The ideological character of much of the economics profession in the United States suggests that there are rewards for producing scholarship that confirms the idea that the minimum wage causes unemployment, and punishment for scholarship that finds otherwise.

David Card, a highly regarded economist at Berkeley (among other honors, he won the John Bates Clark Prize, a prestigious award given every two years to the most outstanding economist under 40), has produced many of the best studies taking issue with the old conventional wisdom about the minimum wage. But he stopped studying this subject, to a large degree because the reception his research got was so hostile in some quarters of the economics profession. He said:

I’ve subsequently stayed away from the minimum wage literature for a number of reasons. First, it cost me a lot of friends. People that I had known for many years, for instance, some of the ones I met at my first job at the University of Chicago, became very angry or disappointed. They thought that in publishing our work we were being traitors to the cause of economics as a whole.

“Traitors to the cause of economics as a whole”! Those are strong words, especially coming from someone who seems, on the basis of interviews at least, to be a fairly mild-mannered, non-drama-queen kind of guy. And if someone who’s a tenured full professor and one of the leading lights in his field took so much heat that he abandoned this line of research, what do you think the chances are that aspiring Ph.D.s and ambitious young assistant professors are going to touch this issue with a ten-foot pole?

I mentioned before that I found some of the criticisms by Murphy et al. of the 1994 Krueger and Card study to be quite legitimate. But they made other criticisms that have not been so reasonable. Here is Murphy et al. on what economic theory has to say about the minimum wage:

The implications of the theory are also simple and direct. The prediction that an artificial increase in the price of something causes less of it to be purchased is the most fundamental prediction of economics; it is called the law of demand.

Well, actually, it’s not so clear that an “artificial” increase in price will necessarily cause less of the good to be purchased. For one thing, it depends on the elasticity of demand for the good. If demand is perfectly inelastic, an increase in price would not lead to a decrease in demand.

More importantly, though, it’s a huge mistake to view the purchase of a unit of human labor as being exactly the same as the purchase of a widget. What economics has done is to take the models of the supply and demand of consumer goods and apply them to the supply and demand of labor. This, I believe, is fundamentally wrong-headed. Human labor and consumer goods are categorically different, and it’s a big mistake to treat them as if they were interchangeable. There are a slew of institutions, norms, and other features of labor markets that do not apply to product markets.

When I first read that paper by Murphy and company, I was struck by the passages in it about “the law of demand” and how you can’t “repeal” the law of demand. It was so literal! Now, I should mention that I’ve taken one of Kevin Murphy’s classes and I am familiar with his work. I have great respect for him. He is a first-rate economist, a brilliant econometrician, a gifted teacher, and, so far as my limited dealings with him go, a really nice guy to boot. But he is a University of Chicago economist in every sense of the word. I’ve heard him speak, and he is quite contemptuous of the idea that regulation can ever improve anything, or that the government can ever do a better job of anything than the free market.

I also believe, based on his writings, that Kevin Murphy, like all too many economists, takes the models literally. He is so enamored of them that he sees them, I think, not as tools for understanding, but as God’s revealed truth, handed down to Moses on stone tablets. He’s an economic fundamentalist, if you will.

Fortunately, though, the old-fashioned theories about labor markets that Murphy and others hold are gradually being displaced. A 2000 survey showed that less than half economists agreed that an increase in the minimum wage will always increase unemployment among young and unskilled workers; just ten years before, over 60% of economists believed that. And in 2006, over 650 economists, including Nobel laureates Joseph Stiglitz, Kenneth Arrow, Robert Solow, Lawrence Klein, and Clive Granger, signed a statement supporting an increase in the minimum wage. They wrote, “We believe that a modest increase in the minimum wage would improve the well-being of low-wage workers and would not have the adverse effects that critics have claimed.”

In the interview I cited earlier, David Card gives a good description of how the new theories about the labor market differ from the old models, and what his research on the minimum wage has to do with this:

What we were trying to do in our research was use the minimum wage as a lever to gain more understanding of how labor markets actually work and, in particular, to address a question that we thought was quite important: To what extent does the simplest model of supply and demand actually describe how employers operate in the labor market? That model says that if an employer wants to hire another worker, he or she can hire as many people as needed at the going wage. Also, workers move freely between firms and, as a result, individual employers have not discretion in the wages that they offer.

In contrast to that highly simplified theoretical model, there is a huge literature that has evolved in labor economics over the last 25 years, arguing that individuals have to spend time looking for job opportunities and employers have to spend time finding employees. In this alternative paradigm a range of wage offers co-exist in the market at any one time.That broader theory is, I think,pretty widely accepted in most branches of economics. . . . The theory explains a lot of things that don’t seem to make sense, at least to me, in a simple demand and supply model.

For example, what does it mean for a firm to have a vacancy? If a firm can readily go to the market and buy a worker, there’s no such thing as a vacancy, or at least not a persistent vacancy. During the early 1990s, when Alan and I were working on minimum wages, it was our perception that many low-wage employers had had vacancies for months on end. Actually many fast-food restaurants had policies that said, “Bring in a friend, get him to work for us for a week or two and we’ll pay you a $100 bonus.” These policies raised the question to us: Why not just increase the wage?

From the perspective of a search paradigm, these policies make sense, but they also mean that each employer has a tiny bit of monopoly power over his or her workforce. As a result, if you raise the minimum wage a little—not a huge amount, but a little—you won’t necessarily cause a big employment reduction. In some cases you could get an employment increase.

I believe that that model of the labor market is correct. There are frictions in the market and some imperfect information.

Now, getting back to monopsony: first of all, for readers who are unclear about what the concept means, I suggest that you read this post on my blog, which explains the basics and some of the policy implications. But here, I will just say this: just as monopoly means “one seller,” monopsony means literally “one buyer.” In the context of labor markets, it suggests one buyer of labor, i.e., one employer.

Except that’s confusing, because when economists use the term today and apply it to labor markets, they generally don’t mean literally one employer. Rather, they mean that the supply of labor to an individual firm is not infinitely elastic—i.e., if an employer cuts wages by one cent, all the workers at that firm won’t immediately quit. The monopsony model holds that because employers set wages, and because of important frictions in labor markets (such workers’ heterogeneous preferences, incomplete information, firm-specific human capital, and mobility costs), employers have some degree of monopoly power over their employees. Which means that they can set wages below the levels that would occur in a labor market where there is perfect competition.

Theory predicts that if a minimum wage is set in a monopsony labor market, it can actually increase employment. It won’t necessarily do that, though—if you set it too high, employment will decrease. But that’s a huge contrast with the textbook perfect competition model, which predicts that a minimum wage increase will always, inevitably decrease employment.

Some economists believe that the monopsony model is, for the most part, a better fit for labor markets than the old perfect competition model is. After all, how realistic is it that, if your employer cuts wages by one cent, everyone at your workplace will immediately quit? Btw, I have asked variations of that question numerous times on previous blog posts, and Megan McArdle has not yet answered it. To be fair, all models are stylized and radically simplified representations of reality, and leave out many features that are very important in the real world. Still, some models are better than others at getting the basics right.

Getting back to the 1994 Krueger and Card paper— it’s not clear that a monopsonistic labor market explains their results. In fact, in their paper they consider, but then reject, such an explanation. There have also been other explanations for why increasing the minimum wage doesn’t always decrease employment, including matching models (which emphasize search costs), efficiency wage models (“where firms suffer from diseconomies of scale in monitoring workers and, therefore, must increase wages when expanding their workforce to maintain the required penalty for shirking”), and training enhancing models (“where a binding minimum wage induces workers to raise their productivity to the level of the minimum by acquiring education which otherwise would not have been taken”).

The other theories have their strengths, but I think a monopsony model is a better fit for most sectors of the labor market in the U.S. McArdle rejects this, at least in respect to the fast food and low-wage retail sectors. First of all, she points to “extremely low search costs on both sides” in the low-wage sector. True, the search costs tend to be low. But it’s also true that information is not complete. Employees don’t always know what other low-wage retailers are paying, and once they’ve found a job they generally don’t go out of their way to seek out info on the going rates at other workplaces.

Mobility costs are another factor. For a lot of people, particularly in less densely populated areas, it’s important that their workplace is not too far from home and doesn’t require a long commute.

I think heterogeneous preferences can be important here, but McArdle says:

This seems unlikely. It’s not like you’re taking a lower wage at Wendy’s because they have a great dental plan and they let you use the pool. The labor is unskilled, the wages are undifferentiated, and the benefits are nonexistent. Maybe there are some people out there who love Wendy’s food, or Gap clothes, so much that they never want to consume anything else, making the employee discount super valuable. But I cannot believe that this group is sufficiently large to be driving the market.

Heterogeneous preferences go far beyond preferences for certain kinds of benefits or types of work. It can also mean preferring to work for a particular boss, or with certain co-workers, or on a certain schedule. When I was in college, for several years I worked at a crappy data entry job. The pay was low, and I could have gotten paid much more doing something else, but my work schedule, 8 pm to midnight every weeknight, was ideal, because it was compatible with school.

Similarly, I was a research assistant for a project that looked at the low-wage retail sector, and one thing we discovered was that scheduling policies were very important to workers. It’s common in the low-wage retail sector for employees not to know from one week to the next what their schedule will be—they are expected to be “available” at all hours. Needless to say, this can be extremely problematic for single mothers with child care issues, or for students seeking to balance school and work. But although unpredictability in scheduling was the norm, their were some bosses and some workplaces that enabled workers to make their schedules in advance. So if a worker who desires predictability finds a job that provides it, she’s going to be reluctant to switch jobs, even if the pay is higher.

McArdle also mentions that collusion and cartels are unlikely. I don’t disagree with her there; in fact, I have never once mentioned collusion or cartels as a cause of monopsony. Economists who are proponents of the monopsony model don’t make the collusion argument, either. For example, Alan Manning, who has written the standard work on monopsony in labor markets, mentions employer collusion only once in his book, and that’s in passing, and he dismisses it as an explanation, anyway. Which is not to say that employer collusion never happens; it sometimesdoes. But so far as I know, it is rare, especially in the low-wage retail sector.

Finally, McArdle says she doesn’t think that the monopsony model is a good fit for the low-wage retail sector, since there is so much turnover there: “empirical evidence,” she says, shows that “most people do not stay in only one industry, much less only one firm.” But monopsony doesn’t require that turnover rates be low. All it requires is that there is some—maybe only just a little—friction in the labor market, such that worker turnover is not 100% sensitive to the wage.

If McArdle believes that raising the minimum wage will always create unemployment, which is what the perfect competition theory predicts, then I’d love for her to explain the many studies (which I cite above) that show that it doesn’t. Yes, over the years there have been even more studies that show there is a disemployment effect, but that’s not necessarily inconsistent with monopsony. The problem that the economic fundamentalists have to deal with is that the perfect competition model makes a number of very strong, and highly implausible, assumptions. It assumes that employers don’t set wages, for one thing, and although in some settings that’s obviously not true, in most cases it is the norm.

More important, the perfect competition model assumes a frictionless job market, with complete information, no search costs, no mobility costs, no heterogeneous preferences, no firm-specific human capital. Indeed, they assume a job market so frictionless that if an individual employer cuts wages by even one cent, every employee at that firm will immediately quit. Which is a more realistic assumption, do you think—that we live in a world where there are certain frictions in the labor market that to some extent bind employees to their employer? Or that we live in a world so frictionless that if an employer cuts wages by a penny, all employees at that firm will immediately quit?

I’m still waiting for an answer for that one.

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The Econ 101 model of wages and employment being determined by supply and demand is logically invalid. (I’m assuming perfect competition, no information asymmetries, etc.) That this model is false has been known for a couple of generations – at least, but it is difficult to get an introductory textbook adopted if it does not contain nonsense.

In the current issue of Kyklos, Colander publishes a survey of PhD students in Europe. He finds that young European economists are slightly more likely than those from the U.S.A. to have no opinion or disagree with the proposition that “a minimum wage increeases unemployment among young and unskilled workers.” European results: No opinion 11%, disagree 25%, agree with reservations 38%, and agree 26%.

How about: increased wages at the lowest end of the economy leads to increased demand for the goods and services that those low-wage employees are prone to buying. The laid-off fast-food worker tumbles into a job at the local grocery store, because the grocery store finds itself selling more groceries to people who can now afford them?

One thing that always puzzled me about the Econ 101 model was knowing that, for all the times Congress has raised the minimum wage, the economy has responded with a decreased unemployment rate in the succeeding months (save one time in the 1960s). A gross measurement, to be sure, but a striking one.

Concentrating on the “employment decrease” thing this way seems weird, it only makes sense if you assume that the price of the fast-food stuff should remain constant.

But, in fact, in response to the bump in minimum wage the fast-food joints could all raise prices and then we are talking about price elasticity of chicken nuggets, that is probably higher than that of labor. And so now it’s not the issue of unemployment anymore, but of inflation.

My (uneducated) sense is that a significant increase in the minimum wage will cause a spike in inflation – it’ll ripple to other wages and some prices will go up – until the next equilibrium is reached. This new equilibrium will have lower income inequality. The effect on employment is not definite.

McArdle is so notoriously stupid that there are web sites devoted to her idiocy. Referencing her posts drives traffic to her site, which is not a remedial step. The typical pattern of a McArdle blog thread is the following.

1. MM makes half-baked, poorly supported argument.

2. Challenged by readers

3. MM clings to argument and offers feeble supporting arguments.

4. Futher smackdowns delivered by readers.

5. MM restates her position to retreat from her original assertions.

6. Readers call her on changing her argument

7. MM denies that she changed her thesis

8. Readers denounce her as a dishonest idiot

She has done this literally dozens of times, infuriating the readers of the Atlantic blogs and creating a profound mystery regarding her continuing presence.

Here is what it looks like in a simulation:

MM: I’m not prejudiced or anything, but it appears that black people are dumber than whites.

Readers: There is no evidence supporting this inflammatory assertion.

MM: I read something in National Review that says black people are dumb.

Readers: The article you cite has been discredited.

MM: I never meant to say Black people are dumb. What I really meant is that the obstacles society puts before them create situations in which they appear to be dumb.

hh, you need to either immediately point to a post of Megan where she says something even remotely like “Black people are dumb” or shut the fuck up, apologize, and never post a comment again. You don’t say stuff like that about somebody, even only as an “example”.

The comment thread over at notsneaky’s post is extremely high quality, with nuanced and civil arguments on both sides, and I’ve learned a lot from it. Y’all should head on over.

Nonetheless this issue continues to serve as an example to me of how we are all deontologists under the skin and consequentialist arguments are of limited utility. I think most people of a libertarianish persuasion (myself included), economist or not, ultimately oppose the minimum wage on deontological freedom-of-contract grounds: we think that employers have a natural right to offer jobs on whatever terms they damn well please, and interference with that freedom in the name of “social justice” is just plain evil. And I think most lefty supporters of the minimum wage support it on the deontological grounds that workers have a natural right to a living wage, and allowing them to get paid less than that is just plain evil.

And of course each side’s partisans will naturally tend to seek out those empirical data that complement their deontological beliefs with evidence of results generally thought desirable, and will discount empirical data that lean against those results occurring. So Kathy G. may well be right about the bias of the libertarianish economics community; but her argument turned around equally implies that most people in the economic-populist community (which is far larger than the economics community) will tend to unfairly discount anti-minimum-wage empirical results.

None of which means that empirical debates are not worthwhile; but let’s keep in mind that there are differences in principle here too, and that describing a normative principled belief as “fundamentalism” is an easy way to avoid justifying one’s own principled beliefs in favor of name-calling and condescension.

I don’t think anyone takes literally the perfect competition model or the monopsonistic model. They shouldn’t. A monopsonistically competitive model (analogous to the monopolistically competitive model) is clearly more realistic than either case, so you guys are just arguing about the degree to which the low skill labor market is monopsonistic-competitive.

Nicholas, there’s no natural right to anything – but – there are natural interferences with freedom-of-contract. For example, you can’t pay your employee less than it’s necessary to survive, physically survive. So, there is a natural minimum.

And once you admit that there is a natural minimum – whether it’s $1/day, 25 cents/day or whatever – I think it makes your objection unconvincing; assigning any arbitrary minimum doesn’t change anything, conceptually. No?

I honestly think that this stuff is IMPORTANT. Meaning, that the lack of a modern somewhat accurate model on labor and commerce, prices and inflation, is a huge blind spot in terms of public policy.

Keeping it to the minimum wage, while it’s true that some low-value jobs will be eliminated (like they are supposed to be, IMO), as long as the wage is beneath the value, it makes rational sense to keep the job down. Will prices go up? Well that depends on the competition, doesn’t it? Keeping it to fast food, lets say that McDonald’s increases the price of their value menu to 1.50 or 2 bucks or so. But Burger King keeps theirs at the same price, well, then more people buy there, they get more sales and make more money, even though it’s less per unit.

If competition doesn’t matter in terms of pricing, if all that matters is profit margins, then quite frankly, we’ve missed the boat in terms of capitalism and the free market. I don’t think this is the case however. There’s more than enough competition ESPECIALLY in the lower-wage sector to prevent this from happening.

The inflation argument has never really been about it in terms of strict, inflexible margins. I honestly don’t think people would stand for it. The inflation argument is that if people have more money, they are less cost averse, make “worse” decisions, and that allows prices to rise.

This may be true, in fact I think that to a degree it is. But I think this is more of a cultural issue than an economic one.

One final thing, Kathy is 100%, in the real world, there is substantial friction between finding a new job at the lower classes, mainly because that any interruption in wages/benefits can be devastating. Wages are bad enough, but getting sick while between benefits….people in the real world just don’t risk it.

Scheduling is also a huge deal, and can’t be ignored. The number of authoritarian prick middle managers out there would shock you.

The argument against the minimum wage is that it will reduce employment – at least not for the sort of increases we generally think about.

The main argument is that it’s a pointless exercise, as summarised by Card and Krueger in Myth and Measurement:

The minimum wage is a blunt instrument for reducing overall poverty, however, because many minimum-wage earners are not in poverty and because many of those in poverty are not connected to the labor market. We calculate that the 90-cent increase in the minimum wage between 1989 and 1991 transferred roughly $5.5 billion to low-wage workers…. an amount that is smaller than most other federal antipoverty programs, and that can have only limited effects on the overall income distribution.

If economists oppose the minimum wage on the grounds that “employers have a natural right to offer jobs on whatever terms they damn well please” that’s a respectable stance in my view. What pisses me off is when they trot out ye olde neoclassical model of the perfectly competitive labour market to justify their position. Because I know damn well that as soon as they get to grips with almost any real-world problem they will be dragging in search costs, informational asymetries, insiders v. outsiders etc. etc. And knowing that, I feel that in trying to fob me off with the introductory textbook model they are insulting my intelligence. Nobody seems to have a satisfactory answer to the question Keynes posed regarding Pigou: why do these people persist in teaching thories which are completely incompatible with their policy proposals? As he said, it seems to be a society for the preservation of ancient monuments.

You either think that the demand curve for labor slopes downward at the relevant margin or not. If you don’t think it does, you need to argue for that directly. Arguing that the labor market is not perfectly competitive — while true — does not get you there. And if you admit the demand curve slopes downward you are already very close to Kevin Murphy’s point of view.

It is correct that there isn’t always a negative employment effect from raising the minimum wage. The simplest model to explain that result is this: the employer responds by lowering non-money components of the wage, such as working conditions, to keep the real net wage constant. That’s not such a welcome conclusion for what you are trying to argue.

One other possibility that hasn’t been mentioned is that it’s possible that labor supply for some workers may be backward slopping. I know that may seem unlikely for fastfood workers because the income effect is unlikely to dominate the substitution effect but imagine that fastfood workers have more than one job. For simplicity, asssume that there are 2 jobs – one is full-time (non-fast food) and the other is part-time (the fast food job). It’s conceivable that a wage increase could have no effect on employment rate in the presence of multiple jobs and if the labor supply curve of workers is negatively slopped in one of the job with flexibility in hours worked. The unemployment rate in an area may not be affected in this scenario because the fall in the labor demand could be marched by the fall in labor supply.

When Walmart has opened a new store in a depressed inner city area recently the press is full of stories about the long lines of applicants for the 300 or so jobs (number are usually said to be in thousands).

The conservative spin on this is that this proves what a service Walmart is providing to the community and that opposition to their stores is misplaced. Another way to look at this is that even for such a low skilled job only about 10% of those who apply meet Walmart’s standards.

The indicator that it just isn’t a surfeit of riches can be seen when the employment picture is looked at some months down the road. Typically 1/3 to 1/2 of these hires are no longer there any more. In other words, unemployment is preferable to Walmart. Not only have a substantial fraction left, but Walmart has problems replacing them – word has gotten out in the community. Constantly replacing these workers imposes a significant cost on Walmart which tends to contradict the premise that unskilled workers are easily available.

Better wages and better working conditions can be be beneficial to a firm. That many refuse to learn this lesson is a tribute to the triumph of ideology, autocratic behavior on the part of top management and ego mania.

Henry Ford understood this, why does this lesson need to be relearned over and over again?

Even if a rise in minimum wage did produce a drop in employment, there is the moral argument. It is doubtful that the net effect on the low wage working population will be negative. What employers are really afraid of is that the rise in the minimum wage will cascade upward and increase the earnings of those who are not so easily replaced. There is no evidence for this fear either.

It’s a sad commentary on our society when the only measure of a policy “success” is how much it adds to the bottom line of some multi-national corporation.

As an economist who has been teaching this issue in microeconomics classes for nearly 15 years, I have to say that you’ve really hit the spot with this, Kathy. It has always seemed to me to be pretty obvious that in low-skill, low-wage labor markets, employers will have far, far more bargaining power than employees. Therefore, the monopsony model, while not a perfect description of those labor markets, is going to fit them much more closely than the pure competition model.

#9 I think there’s an element of projection here. Obviously, most libertarians are starting from the kind of natural rights position Nicholas describes, and trying to find empirical results that support that (much more blatantly obvious in relation to issues like global warming, where the evidence is clear-cut).

But I don’t think this is true of most leftists. Obviously, we would like to raise the income of low-income households, and therefore we’d like it to be true that policies aimed at achieving this goal worked well. But there’s nothing deontological about this in most cases. Given the evidence that the Earned Income Tax Credit is an effective policy, most lefties support it, as far as I can see.

There might be more of a problem for leftists if there were good evidence that unrestricted laissez-faire raised the income of the poor more than any alternative. But the US experience in particular suggests that this is false.

I don’t want to take this threat off-topic, but having read the links you posted, I think you are terribly off base here.

I don’t see what is so objectionable about those posts? I mean, I can certainly understand why you might disagree with Megan’s arguments, but they are hardly of the “Blacks are dumb” racist statements you suggest.

If you actually read the last post you linked to, you would realize that she was not arguing in favor of torture on the ground that no one has yet to show it doesn’t work. Rather, she says that arguments against torture that rely on its inefficacy are susceptible to the possibility that relative to other interrogation methods it might work. As a result, she says, she prefers arguments against torture on moral grounds (i.e. it is wrong, even if it does work)

Anyways, I do not want to get this thread off-track and start a side discussion, so this is all I am going to say. Your derisive tone is completely unwarranted in this regard. If you don’t like her, fine. If you disagree with her arguments, fine. But you should really be a little more civil.

An element not mentioned is the size of staff needed for even the most streamlined fast food joint.

You cannot cut staff below a certain level and still meet customer demand.

So suppose the minimum staffing of your franchise is 4 people at any given time, and 7 at rush times (averaging out to 5 1/2 full time staff) — raising the minimum wage for these people by 25 cents per hour is not going to reduce the need for staff. It will increase his labor costs by (5.5 x .25) = $1.38/hr. Boo hoo.

If there is stickiness in the movement of labor, there is similar stickiness in needing warm bodies flipping the burgers.

“Given the evidence that the Earned Income Tax Credit is an effective policy, most lefties support it, as far as I can see.”

This is sort of true but in this context the volume of the support seems telling. People on the left are very willing to get quite up in arms about the minimum wage but the EITC usually gets a little more than a shrug from them (this of course isn’t true of leftist economists).
That’s sort of the really annoying thing about these discussions – you wanna help the poor? Sure, let’s raise the EITC and we can get a fairly broad base of support for that as well as more sound theoretical arguments. It’s a lot easier to agree on then the effect of minimum wage. But the minimum wage makes for a good battle ground for ideological arguments so that’s where all the heat is. Even though its practical relevance for plausible, politically feasible levels of an actual level of the minimum wage is slightly more than nil.

“There might be more of a problem for leftists if there were good evidence that unrestricted laissez-faire raised the income of the poor more than any alternative. But the US experience in particular suggests that this is false.”

I think this depends on what this supposed alternative is, or more specifically what level of “non laissez-faire” you’re starting off with. Unrestricted laissez-faire certainly raised the income of the poor relative to, I dunno, feudalism. So there goes one alternative. And once you step away from talking about it in terms of broad ideological categories like “laissez-faire” and reference specific policy proposals, there’s definitely some which are intended to help the poor but end up benefiting someone else in the end.

tyler cowan: “You either think that the demand curve for labor slopes downward at the relevant margin or not. . . . It is correct that there isn’t always a negative employment effect from raising the minimum wage. The simplest model to explain that result is this: the employer responds by lowering non-money components of the wage, such as working conditions, to keep the real net wage constant.”

Or, perhaps I think the overall rate of general unemployment is a variable under macroeconomic policy control.

And, I think that, faced with a minimum wage, firms will organize to bring up marginal labor productivity to match the wage.

The monopsony model implies that firms may already be within easy reach of a higher marginal labor product, but do not have a compelling or competitive reason to realize it, or to pass on the benefits as income to lowest-level workers.

notsneaky, at his site, elaborated on the role of production cost structure, and this elaboration helps to expose the extent to which the orthodox argument rests not just on a market structure (perfect competition v. monopsony), but on a model of production process, and the role of labor in that production process. (Kathy G. notes the inappropriateness of treating labor like any ol’ widget, but does not elaborate.)

A higher wage implies a higher marginal product for the lowest-level worker. How one imagines firms get there may matter. Notsneaky, at his site, imagines that the floor gets mopped less often. I’m not sure how this raises marginal product, but it reflects his benighted view. tyler thinks the marginal product is unaccountably fixed in stone, because he suggests that total unit labor cost will be held constant, by increasing pay, but screwing the worker on other costs, like working conditions. These kinds of imaginative counterfactuals, introduced in lieu of evidence, reveal a lot about the psychology of politics, but not about the economics of the minimum wage.

I, personally, don’t find the monopsony model all that persuasive, but what I do find persuasive is the idea that power matters. It is precisely because I think labor markets at the low end of the wage spectrum are relatively competitive, and workers have little bargaining power, that I think labor law protections for them are important. And, I think the minimum wage is one of those protections.

If a minimum wage means that an employer invests in an electronic cash register that requires little training, I’m fine with that. If the employer has to pay more attention to managing employees, because the employee’s time is more valuable, I’m fine with that, too. If raising the minimum wage causes a small blip in the unemployment rate, signalling a need for fiscal stimulus, I’m okay with that as well.

What I really am not okay with is people like tyler cowan and notsneaky thinking that economics confirms them in their prejudices and contempt, when it does no such thing.

People on the left are very willing to get quite up in arms about the minimum wage but the EITC usually gets a little more than a shrug from them (this of course isn’t true of leftist economists).

EITC or my favorite, GAI, would permit the dropping altogether of minimum wages, welfare, and a host of other supports. But of course then the employer would have to provide some other inducement to get the employee into his shop, or at least not drive him away.

You couldn’t pay me enough to get me to work at McDs, with the constant shrill beeping –nutso! Ditto the mercury vapor lights in Wal-Mart. But some of the better pet shops or bookstores could have me for a song.

“I would suggest that the EITC, without a reasonable minimum wage, falls into this category. Without a minimum wage, the EITC is just a subsidy for low-wage employers.”

and

“Could it be that people on left see this as subsidizing asshole employers who refuse to pay their employees a living wage?”

I think these illustrate my point to John Quiggin pretty well. For some people it’s not really about helping the poor but rather fighting ideological battles and/or making sure that the “asshole employers” get screwed.

Posted by HH:
“She has done this literally dozens of times, infuriating the readers of the Atlantic blogs and creating a profound mystery regarding her continuing presence.”

It’s pretty obvious – she’s ‘balance’, bringing in right-wing readers. Just like with the NYT op-ed page. And just like the NYT, the right-wingers are clearly affirmative action hires, so to speak.

It’s also clear that that’s why she’s not a business person anymore, despite having an MBA from one of the top b-schools of the world: she really isn’t that smart. She’s good at being glib and superficial, but she regularly gets trashed by her commenters. In a business situation, where seriously good analysis was called for, and one’s competitors were highly selected, well trained and smart, she’d be toast.

notsneaky“Unrestricted laissez-faire certainly raised the income of the poor relative to, I dunno, feudalism. So there goes one alternative.”

The people I met when I was homeless could have easily traded places with any feudal serf. Indeed, apart from the shoes I doubt you could tell the difference. It’s equally hard for me to imagine how living in an inner city rat and cockroach infested shithole is all that much of a step up from a medieval hovel. Hell, I’ve had friends who paid 600 dollars a month for an apt with a dirt floor. Oh, yeah, she had a TV, ingrate.

I did not say that the EITC does not help poor people. What I wrote, twice, is that, in the absence of a reasonable minimum wage, the EITC would resolve into nothing more than a subsidy for low-wage employers.

If people are accepting employment, based on a calculation of the wage plus the EITC, then the government is, effectively, subsidizing the wage paid by the employer. This is a straightforward analysis. The logical counterfactual is that, in the absence of the EITC, employers would have to pay more, to fewer employees.

The minimum wage, in my view, can be a useful stop-limit on this effect, preventing employers from creating jobs that pay less. (Unemployment calls for appropriate fiscal and monetary policy to move the economy to full employment.) I remain highly suspicious of any suggestion that the EITC substitute for a minimum wage.

The EITC has many of the same limitations as an anti-poverty device that the minimum wage does, chief among them that it aids the employed. Many poor people are not employed, and may not be employable, for any of a great variety of reasons, including age and disability.

“At this point perhaps you’ve lost the moral right to demand any more proofs of things from people; you have not acknowledged HH’s post in reply to your previous demand.”

It’s nice to know that you’ve been appointed the arbiter of my moral rights, barry. But in case you have trouble following what’s generally known as “a comments thread”, let me inform you that usually a post’s author name is indicated underneath their post. If you scroll through this thread, you will perhaps note that there is only 1 post by somebody named “hh” and no follow ups. So in regard to “you have not acknowledged HH’s post in reply to your previous demand” I just gotta ask. WTF are you talking about?

As to other people’s replies – I don’t really wanna hijack this thread. Folks can follow the links provided by noen and matt and judge for themselves whether Megan’s post come anywhere close to “Black people are dumb”.

Oh. and Barry, I’m pretty sure I’ve told you this before but maybe you forgot so here goes again; fuck off.

“If people are accepting employment, based on a calculation of the wage plus the EITC, then the government is, effectively, subsidizing the wage paid by the employer. This is a straightforward analysis.”

Bruce
Ok first a general recap of the EITC (I’m sure you know how it works but just wanna make sure everyone’s on the same page); if you make some income less than x1 (say 11800 if you got 2 kids) then the government says ok, we’ll add some %, say 40% (if you got 2 kids, less if you got less) to your earnings. If you make more than x1 but less than x2 (15,400 w/ 2 kids) then you get a flat payment (about 4.7k with 2 kids). If you make more than x2 but less than x3 (37.7 k) you get another % of your income minus an exemption (basically 4.7k – 20% of your earnings).

How does the government subsidize the wage paid by employer in this case? In a sense that constitutes “a straightforward analysis”? And in that “people are accepting employment, based on a calculation of the wage plus the EITC”. Well, basically what that means is that some people who would not work without the EITC (or work less without it) will now work (or work more), effectively increasing the labor supply and lowering wages.

Another way to say that is that part of the benefit that people get from the EITC gets passed on to employers through labor market forces.

Ok. But all this implies – or holds only if – LABOR DEMAND IS DOWNWARD SLOPING. If it ain’t – if it’s say perfectly elastic as some people assert when arguing for minimum wages, then the EITC would have no effect on wages, you’d get higher employment and the workers would get to keep all the benefits. But otherwise it’s the standard neoclassical story. In that case, if you think that the EITC partly subsidizes employers you should also think, to be logically consistent, that the minimum wage DOES INDEED lower employment.

I think Bruce actually has a sense of this. Even though the second paragraph doesn’t make sense and does not follow from the first, in the third paragraph at the end of his comment he says:

“The EITC has many of the same limitations as an anti-poverty device that the minimum wage does, chief among them that it aids the employed. Many poor people are not employed, and may not be employable, for any of a great variety of reasons, including age and disability.”

which is exactly right. Neither the EITC nor the minimum wage (if it helps at all) can do much for people who are more or less permanently out of the labor force. And that has to be addressed. But within the menu of policy options aimed at helping the working poor I think it’s pretty clear that the EITC is far better.

The Megan link on the Bell Curve is, if typical, a good illustration of why she isn’t worth reading. She admits she doesn’t remember much about the book, and then spends her post engaged in concern trolling about the possible problem of low IQ. Her conclusion–whether it’s heritable or not, there’s nothing we can do.

I have nothing interesting to say on this subject or most subjects.. Maybe the Atlantic has another job opening.

Notsneaky, I think it’s pretty clear that Bruce is engaged in an consequentialist argument of the kind I described. That is, he is not objected to the EITC because it fails some sort of purity test, he’s arguing that the desired outcomes will be achieved only by EITC+minimum wage. You may disagree, but it’s still an argument about consequences.

As for the fact that leftists are less passionate about the EITC part of this package, that presumably reflects the fact that rightwingers don’t oppose it (if they oppose it at all) with nearly the same vigor as they do the minimum wage.

notsneaky: “part of the benefit that people get from the EITC gets passed on to employers through labor market forces”

See. That wasn’t so hard.

notsneaky: “LABOR DEMAND IS DOWNWARD SLOPING”

You are shouting. I know you think this is some kind of huge logical trump card, and liberals like me are just fantasizing some magical Giffen good of a minimum-wage worker, who never existed. But, that’s really not the case.

A key part of the term, minimum wage, is the “minimum” part. We’re talking about a relatively low-wage — extreme territory relative to the whole labor demand matrix. And, this labor demand territory is extreme in other ways, as well, involving very little in the way of prior sunk cost investments in credentials, skills, expertise, etc., and, typically, very little organization or coordination among sellers of labor.

The transaction for labor services is not a simple one, even for a minimum-wage worker. There’s no simple auction market, where de minimus units of labor services can be auctioned away. Hiring someone, typically, involves an implicit contingency contract, with Knightian risk distribution between employee and employer, etc. The employer will make some investment in training the worker. Some employees will be hired and rejected after a trial; some employers may be rejected by employees after a trial. I could go on and on, and labor economists could elaborate endlessly. The general point is not that the labor demand curve does not slope downward, but that the precise line you evidently imagine marking the functional link between a wage and a quantity-of-labor-demanded is lost in a cloud of other transaction costs, risks and considerations. That these other considerations dominate is evidenced by the fact that small changes in the wage don’t have drastic effects; everyone doesn’t quit after a 1 penny cut in the wage.

I would add that the Paretian firm, continuously combining units of resources to maximize profit, which you so ably laid out on your site, is not a good model for what is going on in this cloud. The take-it-or-leave-it of the profit-maximizing firm under complete information is a technologically determined marginal product. That’s not how I imagine a real firm. I imagine a firm controlling an error-prone production process, where the relation of employer and employee has important elements of the relation of principal and agent; such a firm is not maximizing profit — rather it is managing residual returns and rents on its owned capital resources. Marginal product in such a firm is no technologically-determined, precise dot; if it exists at all, it, too, is a cloud, an expected range, an Edgeworth field. And, take-it-or-leave-it negotiation of such a firm is not technologically-determined or benign; it is an exercise of the power to make the first move in a complex game with, potentially, many equilibria.

I do presume that labor demand slopes downward, and that presumption is reflected in my general expectation that whether any marginal change from a particular level of the minimum wage has an appreciable effect on constraining employment depends on just how low the minimum is. But, given the cloud of other transaction costs, that negotiation matters, and employees are in a weak negotiating position, and that employing firms are organized in a way that creates real negotiating discretion, modest changes in a low minimum wage can reasonably be expected to have very small employment effects of indeterminate sign.

It should be noted that an “optimal” minimum wage probably ought to reduce employment somewhat at the margin. A small change in employment can be more than compensated for, by a large increase in income. So, I would not dismiss a minimum wage increase as bad policy, just because it resulted in a small decrease in employment at the margin.

A minimum wage simplifies negotiation, by providing a ready benchmark. Contra tyler cowan, raising a minimum wage may well improve working conditions for sub-minimum-wage workers (yes, Virginia, there are millions of sub-minimum-wage workers; imperfect enforcement is part of the policy environment).

Also, a minimum wage may be accounted a useful feature of macroeconomic policy, which aims to maximize employment, improving the unemployment rate as an indicator, by minimizing the potential for the disguise of underemployment at deflated wages.

“As for the fact that leftists are less passionate about the EITC part of this package, that presumably reflects the fact that rightwingers don’t oppose it (if they oppose it at all) with nearly the same vigor as they do the minimum wage.”

Right, which was my point – most of this discussion is about scoring ideological/rhetorical points rather than making a case for policies that actually work.

“See. That wasn’t so hard.”

That’s because I never disagreed. The point is, so what if it helps employers? As long as it helps lower skilled workers.

As far as the rest of your comment – I think you took this “cloud” analogy a little bit too much to heart. I’m having trouble making out what exactly is in that cloud of words you got there. Yeah, there’s transaction costs, uncertainty, all that stuff. Even in minimum wage employment. How you go from that to “it is an exercise of the power to make the first move in a complex game with, potentially, many equilibria.” (with the implication that somehow minimum wages are good) and all that stuff.

This is essentially the underpants argument:
1. The simple economic model is too simple to capture the complex reality of real world firms.
2. …
3. Profit! Or in this case “minimum wages must be good!”

Where 2) involves an obfuscating “cloud” of words strung together with true-enough-but-so-what descriptions about how the real world hiring process works.

The only things I can make out:
“That these other considerations dominate is evidenced by the fact that small changes in the wage don’t have drastic effects”

Small changes in the wage don’t have drastic effects in the “standard model” either. So it isn’t evidenced of anything.

You got any evidence that this is anything more than just wishful thinking on your part?

“Contra tyler cowan, raising a minimum wage may well improve working conditions for sub-minimum-wage workers”

And contra somebody somewhere, raising a minimum wage may well cause dry skin and bad breath. Once you got that “cloud” in there, who knows what’s gonna come out of it?
Or again, if you gonna make an argument you need more than an assertion – lay out the precisely how this improvement in working conditions would exactly come about.

And yes, I also don’t understand the last paragraph either. I’m dense like that. Humor me. Explain slowly, precisely and exactly what it is you’re talking about.

Really? The standard model must be very different from the one I see in the textbooks then. There I read that the firm’s problem is to choose a level of employment, n, so as to maximise pf(n)-wn where w and p are given constants. That doesn’t make a whole lot of sense if the firm can cut w by a penny without the entire workforce downing tools.

I take it that your standard model is not the textbook model, but the less formal one with the bells and whistles and epicycles attached to it – adjustment costs, variable working conditions (thanks Tyler, that’s another one for my already huge list of economists’ fudge-factors), imperfect information etc. Maybe Bruce Wilder has taken cover in a cloud, but it didn’t take you long to disappear into one of your own.

Which is my long-winded way of saying Kathy has you dead to rights. The perfectly competitive model as set out in textbooks like Varian and Mas-Colell et al is exactly as she described it. She couldn’t possibly caricature it since it’s a caricature already.

The essential problem with the classical model of the labor market is it assumes that demand for labor is relatively elastic. The truth is that, in competitive markets, the demand for labor is almost entirely derived demand [derived from the demand of customers for that industry’s product] and is therefore largely inelastic.

In such markets, employers do not hire people simply because the price of hiring them has dropped a bit. Generally speaking, in competitive markets, employers only hire the people they NEED. If the price of labor increases, they will pay the hire price because they NEED the people who are working for them. If an employer lays off employees because the price increases by say 20%, then that employer did not actually NEED them to begin with, which means that the industry would not really be price competitive. Profit maximizing firms in price competitive industries do not keep employees on the payroll that they do not actually NEED.

What happens if one fast food restaurant lays off workers because of an increase in the Minimum Wage? Well, it would no longer be able to provide the same quality of service in a competitive industry, so they would lose market share if their competitors choose to retain their entire staffs and continue to provide superior service. Since most employers are rational profit-maximizers, they will not cut their staffs when facing increased labor costs, but will try to pass them on to their customers. If they cannot pass on the increased costs, then they will necessarily be forced to accept a smaller profit margin.

The idea that employers only hire people as an act of charity—if the price is low enough—is ludicrous. They only hire the people they NEED, and that means that—generally speaking—no one is going to lose hiser job if the cost of employing needed help increases, simply because it really isn’t an option for firms in competitive markets. Can you say vertical demand curve for labor?

Or that we live in a world so frictionless that if an employer cuts wages by a penny, all employees at that firm will immediately quit?

Wouldn’t the perfect competition model suggest that only the last employee requires the current wage, and that previous employees might well have been willing to work for less. So a cut of wages of a penny is only guaranteed to get one person to quit, although it might get more, even taking the perfect competition model at its most literal.

Not that I think it is a good model for that particular market, for other reasons, some of which have been touched on in the OP and the thread.

Since most employers are rational profit-maximizers, they will not cut their staffs when facing increased labor costs, but will try to pass them on to their customers.

Exactly. It’s gotta be more about inflation than unemployment. If you quadruple the minimum wage, obviously a half of the workers are not going to lose their jobs, rather it’ll be a spike in inflation.

I don’t see why increasing it by 20% is any different. There will be a spike in inflation, but, of course, much smaller than 20%. In the end a minimum wage worker will gain, say, 17% in purchasing power. What’s wrong with this model?

John Quiggin: As for the fact that leftists are less passionate about the EITC part of this package, that presumably reflects the fact that rightwingers don’t oppose it (if they oppose it at all) with nearly the same vigor as they do the minimum wage.

notsneaky: Right, which was my point – most of this discussion is about scoring ideological/rhetorical points rather than making a case for policies that actually work.

I don’t think that’s what John was saying; it’s that there’s more need for liberals to be passionate about the minimum wage, because of the greater pushback against the minimum wage. As an analogue, access to contraception is surely more important to reproductive freedom than access to abortion, but reproductive freedom advocates generally spend more energy on abortion rights, because reproductive freedom opponents spend massive amounts of energy trying to ban and restrict abortion, but no one is (yet) trying to ban contraception.

And (though I had to look this up) according to Wikipedia the EITC has been expanded with every major tax bill, in 1986, 1990, 1993, and 2001, though I don’t know if it’s risen fast enough (and don’t even know how to measure that — I suppose “Keeping pace with inflation” does make sense here?). Whereas the minimum wage, before the last increase, hadn’t increased for over ten years, and notoriously had fallen well behind the rate of inflation.

However, there is an important way in which there is a lot of pushback against the EITC so that liberals should be more passionate about defending it. Thanks to pressure from the formerly Republican Congress (in particular, William Roth’s egregious 1997-8 hearings about the IRS), as of 2004 “EITC applicants [were] eight times as likely to face audits as people earning $100,000 or more, even though the maximum amount of money that someone can get from the EITC is about $4,000 in a year.” So liberals should certainly be passionate (or more passionate) about reducing IRS harassment of EITC recipients. On the other hand, I don’t know if there’s a legislative solution at this point.

Me, I don’t buy the idea that an increase in the minimum wage will increase employment. But as Barry will no doubt be along to tell us all again, that’s because I’m some dreadful rightie.
(There’s another reason I’m mostly unconcerned about raising it, which is that the majority of those who actually work for that minimum wage are in tip receiving jobs so it’s not the only, not even in many cases, the majority, source of their income.)
What makes me not buy the argument is this from the Low Pay Commission’s own report a couple of years back:http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2005/02/tony_blair_toda.html

“The first rule of economics, of course, says that if you raise the price of something, you’ll reduce demand. And this means shorter hours and job losses for some of the low paid.

In particular, appendix 3, which starts on page 213 of this pdf. It contains a survey of employers who were affected by the rise in the minimum wage in 2003. It shows that: 37 per cent of them cut staffing levels, whilst only 4 per cent raised them; 31 per cent cut basic hours worked whilst 3 per cent raised them; 28 per cent cut overtime hours; 81 per cent said their profits fell; and 63 per cent said they raised prices.

This, of course, is exactly what basic economics would predict. It corroborates this research, which shows that where the minimum wage bites hard – for example in care homes – it does reduce labour demand.

Which raises the question: how could anyone ever have thought otherwise? For example, TUC general secretary Brendan Barber: “Employers and politicians who said that [the minimum wage] would cause job losses have been proved wrong year in, year out.”

One reason is that there is some research (like this pdf) which shows that the introduction of the minimum wage did not reduce employment.

Another reason is that advocates of the minimum wage focus on its macroeconomic effects, where any impact of the minimum wage would be too small to be detected. For example, the Low Pay Commission estimates that 2004’s uprating added just 0.08 per cent to the aggregate wage bill. Assuming a price elasticity of demand for labour of 0.6, and that all the adjustment came in job losses rather than shorter hours, this would have cost just 13,000 jobs. That’s equivalent to less than two days inflows into the unemployment figures. “

Here’s more on EITC audits and other issues the EITC faces, concluding that it would be helpful to simplify the program. I don’t know whether it’s right on the details, though I think that in general simplifying these kinds of programs is a good idea.

“There’s another reason I’m mostly unconcerned about raising it, which is that the majority of those who actually work for that minimum wage are in tip receiving jobs so it’s not the only, not even in many cases, the majority, source of their income.”

Hmm, according to this report many British employers in the restaurant trade pocket tips or count them towards the minimum wage:

“# The industry with the highest proportion of workers with reported hourly wages at or below $5.15 was leisure and hospitality (about 14 percent). About three-fifths of all workers paid at or below the Federal minimum wage were employed in this industry, primarily in the food services and drinking places component. For many of these workers, tips and commissions supplement the hourly wages received. (See table 5.)”

The EITC would work well if there was steep progressive taxation. Otherwise, taking from the guy who just managed to pull himself out of poverty and giving to the guy who is still in poverty doesn’t seem like a brilliant solution to anything.

What happens if one fast food restaurant lays off workers because of an increase in the Minimum Wage? Well, it would no longer be able to provide the same quality of service in a competitive industry, so they would lose market share if their competitors choose to retain their entire staffs and continue to provide superior service.

Not a realistic view of how a fast food restaurant works.

There is a minimum feasible crew for a fast food restaurant, which is not elastic. Fewer workers than that, and the restaurant has to close. It’s not realistic to try to reduce the crew past that point. An increse in minimum wage for those workers does not lead to higher unemployment, unless the wage is increased so much that going out of business looks like an acceptable alternative to the owners.

Thanks for the data, Tim. But that doesn’t really tell us how many of these workers receive tips — it would count fast-food workers who generally do not receive tips. It would also count hotel employees who, I’m going to guess, don’t receive enough tips to make a huge difference in their wages. And insofar as the minimum wage law doesn’t apply to restaurant workers, it’s not an argument against the law that restaurant workers rely on something other than the wage, since the law isn’t applying to them anyway.

notsneaky: “It’s nice to know that you’ve been appointed the arbiter of my moral rights, barry. But in case you have trouble following what’s generally known as “a comments thread”, let me inform you that usually a post’s author name is indicated underneath their post. If you scroll through this thread, you will perhaps note that there is only 1 post by somebody named “hh” and no follow ups.”

You’re right – you were b*tchslapped by noen.
Which you still haven’t acknowledged.

“So in regard to “you have not acknowledged HH’s post in reply to your previous demand” I just gotta ask. WTF are you talking about?”

The proof which noen posted which was *directly relevant to your demand for proof, and which quoted you, by name*. Talk about difficulties reading comments threads.

As to other people’s replies – I don’t really wanna hijack this thread. Folks can follow the links provided by noen and matt and judge for themselves whether Megan’s post come anywhere close to “Black people are dumb”.

“Oh. and Barry, I’m pretty sure I’ve told you this before but maybe you forgot so here goes again; fuck off.”

I don’t recall you saying that before, and it comes off pretty weak. Having problems with that whole proof thing?

Matt: I only mention it because it’s an example of how few people actually do rely upon the minimum wage. Which is why I don’t worry about it very much. Put it up or don’t, its not that big a matter.

No, I don’t accept the arguments that Kathy G is putting forward either, but that’s an entirely different thing. Unless and until someone starts trying to make the minimum wage something like the median wage ($14 an hour isn’t it?) it’s lots of heat and not much light.

oops – the third to last block should have been quoted; it’s from notsneaky. I guess that invalidates everything that I wrote, and shows that notsneakys is not only not sneaky, but not wrong, and radiating glorious rays of righteiousness.

These ‘comment threads’ are indeed difficult, but thanks to notsneaky, us Evul Leftists will figure them out.

“Hmm, according to this report many British employers in the restaurant trade pocket tips or count them towards the minimum wage:”

The UK experience is indeed different. As the recent Starbucks case shows, tips in the US legally belong to the wait staff. UK law is supposed to be the same but it’s a lot more difficult to insist upon it. As I know from my experiences doing the waiting type jobs in the UK…

Excellent post. Though, fundamentalist that I am, I remain skeptical about the proposition that minimum wages generate positive surplus to society, the simple spot market model is clearly inedequate for addressing labor market questions. For those interested, some more discussion about the current state of theory can be found here: http://macroblog.typepad.com/macroblog/2006/12/modern_labor_ec.html .

JQ, when someone wrongly accuses someone else of racism, the proper response is to tell them to shut the fuck up. Next time you’re cleaning up, why don’t you clean that crap out? Or do you mean to endorse it? That wouldn’t surprise me, but be direct, you little coward.

What upsets libertarians like myself (mostly a libertarian) is that people use the force of the state to force an employer to give an employee their money. What if their job isn’t worth minimum wage?

It also assumes averages over large groups and not realities for individual businesses. Hey, the average employer could afford this. What if I’m on razor-thin margins in a competitive market and I have to choose between firing people and going out of business? I’m just out of luck.

Instead of forcing employers to give people more money than they are worth, just give them some of your own money. In other words, real generosity.

When the minimum wage increases, incentives to engage in illegal or paralegal activities (such as undeclared work) decrease. Possibly, an increase of the minimum wage could therefore increase employment in this way. I don’t know if this could be a significant factor (it probably depends on the country, in Greece or Italy, illegal activities are said to account for a significant part of the national economy).

Whaaat? Undeclared work takes place because the costs of declared work are too high….it might be taxes, health and safety, hours allowed (I’m deliberately excluding illegal activities here) or the wage that must be paid that create the opportunity for there to be such undeclared work. Quite how raising the costs of declared work will “decrease” the amount of undeclared I’m not sure.

There is a minimum feasible crew for a fast food restaurant, which is not elastic. Fewer workers than that, and the restaurant has to close. It’s not realistic to try to reduce the crew past that point. An increase in minimum wage for those workers does not lead to higher unemployment, unless the wage is increased so much that going out of business looks like an acceptable alternative to the owners.

Without trying to assert an opinion on the main issue, I don’t think this is right: A fast-food restaurant at minimum staffing level does have an alternative to going out of business, and that is to reduce its hours of service. A restaurant may be open around-the-clock and at least marginally profitable even at 2 am, but find that if its labor costs go up, it will no longer be profitable during the midnight-to-5 am shift and will close during those hours, reducing its total employment. Of course, similar service reductions are available even for restaurants not open 24 hours, and seasonal restaurants in tourist areas may choose to open a few weeks later in the season and close a few weeks earlier.

Re: EITC, in addition to Matt’s helpful data on how often it has been expanded, I’d point out that a number of states have enacted their own EITCs. I certainly get plenty of e-mails from anti-poverty organizations exhorting me to call my legislators in support of state-level EITC. So there are certainly some lefties out there agitating for this tool.

Another point regarding the minimum wage that I haven’t seen mentioned in this thread yet is that many other things are indexed to it — such as union wages in some contracts. So there is a massive, semi-hidden incentive for even people who are not themselves living or employing others at the minimum-wage level nevertheless to resist (or support) raising it.

With regard to mobility of low-wage workers, it’s worth mentioning again that one major US hotel has a 90-question, 16-page personality test for its housekeepers, and that is not counting the rest of the online application. Especially as more and more service jobs move toward online-only applications, the cost of job-switching for applicants who don’t have home computers and/or have limited literacy can be quite high.

Finally, with regard to how raising the costs of declared work will “decrease” the amount of undeclared — people work off the books for a lot of reasons. Incentives such as avoiding child support (or being able to pay in cash to the mother of your child rather than have it garnished from your paycheck and given to the state welfare department as “repayment”) are certainly there. But there are also many incentives for people to move into the legit workforce: increased payroll income means better ability to build credit, obtain a mortgage, work enough recognized quarters that you will be able to receive Social Security, to name a few.

notsneaky: “Once you got that “cloud” in there, who knows what’s gonna come out of it?”

One doesn’t really know a priori, which is a reason to do careful study of facts. As Quiggin says, I am making a consequentialist argument. I am not a “dust bowl empiricist”, though, and I think you need theory to understand and identify the consequences, not least because much of what is going on in the world is not observable, and even when one goes out and looks carefully, much must still be inferred.

“employing firms are organized in a way that creates real negotiating discretion,”

Ah yes. The famous Fast-Food-Restaurant-Movie-Rental-Place-Coffee-Shop-Hardware-Store-Ice-Cream-Parlor-Cloth-Store-Pet-Shop-with-Tropical-Fish Cartel.

I was actually making a point about the internal organization of production in the firm, not about the structure of markets. I was saying that modeling the representative firm’s production process with a production funtion yields a misleading picture of how the firm will respond to a mandated increase in the wage. A better model of the production process and a better theory of the firm would suggest that other outcomes are possible for many firms.

If you model the firm’s production process with a classic production function, where output is a function of inputs (because management is perfect and output is always at a maximum relative to the inputs used), then, yes, the wage is a technologically determined marginal product.

The production function is an inadequate analysis, theoretically faulty because it does not identify all the necessary and sufficient elements of production. (There’s no management or anything but the allocation of resources to manage.) Output is obviously not a function of inputs, and the trick of just assuming that output is “maximized” does not plausibly repair the breach.

Real firms, including restaurants and movie rental and pet shops, are managed and management is preoccupied with coping with error and random variations, that have nothing to do with allocative efficiency. In these real firms, the nominal wage is only one part of labor costs, and labor input does not have a fixed, functional relationship to output. The nominal wage is subject to a genuine discretion. It is not a technologically determined and precise marginal product; it is a strategic variable, under management’s control within some range, as management contends with the employee over the employee’s behavior as well as “the labor services input”.

So, if the representative firm must pay the representative Joe Smith $6/hour instead of $5/hour, while it is true in some sense that the firm will have to re-organize its production process to raise Joe Smith’s marginal product to match his new wage, it does not follow, logically, that the firm’s output must be reduced or that the firm must use less of Joe Smith’s labor services (time).

I tried to be clever about a “take-it-or-leave-it” wage offer. In the production function, competitive firm world, the “take-it-of-leave-it” wage offer follows from technological determination of marginal product. In the real world, a “take-it-or-leave-it” wage offer is an exercise of an employers’ strategic power to make the first move in a game. The power to make the first move, and use the first move to make a take-it-or-leave-it offer is, as game theory shows, a lot of power; it is not, I think, exactly the same as monopsony, but it is power, and much of what Kathy G. argues, follows.

The implications of strategic discretion are not necessarily founded on market structure, or limited to market structure. One deep implication of strategic discretion is that output is not such a strict function of inputs that we can reliably conclude that a marginal increase in the price paid for an input will reduce output, or even reduce the quantity of the input used. If we are in a world of strategic discretion, then we are not in a world that can be adequately modeled by the production function’s model for income distribution.

notsneaky: “The point is, so what if it helps employers? As long as it helps lower skilled workers.”

The point is, that I don’t want to subsidize low-wage, low-productivity work, because I don’t want more low-productivity work.

My black liberal heart favors a minimum wage, at bottom, because I think there’s work so unproductive that it is not worth doing. I don’t think it “helps” the poor to force them to sacrifice their leisure to work for too low a wage. We send people to prison to break rocks and stamp out license plates for pennies an hour; it is a punishment, and it is a waste of life.

Subsidizing low-wages seems wasteful to me. Sure, the poor have a better income, but they are still not engaged in genuinely high-productivity work. In limited circumstances, I can accept it as a second-best solution — I support Goodwill Industries, but ambivalently. But, engaging in low-productivity work remains a waste of life, even if charitable intervention relieves somewhat the burden of low-income.

An element not mentioned is the size of staff needed for even the most streamlined fast food joint.

You cannot cut staff below a certain level and still meet customer demand.

And

The idea that employers only hire people as an act of charity—-if the price is low enough—-is ludicrous. They only hire the people they NEED, and that means that—-generally speaking—-no one is going to lose hiser job if the cost of employing needed help increases, simply because it really isn’t an option for firms in competitive markets. Can you say vertical demand curve for labor?

and

There is a minimum feasible crew for a fast food restaurant, which is not elastic. Fewer workers than that, and the restaurant has to close. It’s not realistic to try to reduce the crew past that point. An increse in minimum wage for those workers does not lead to higher unemployment, unless the wage is increased so much that going out of business looks like an acceptable alternative to the owners.

These sorts of arguments are wrong, because they mistakenly assume that (a) all jobs must be done, and (b) all jobs must be done by employees. Neither is the case. There are tasks that are worth $X to a business but not $X+1. If you force me to pay an employee $X+1, I will either:

A) Forego the task entirely;
B) Do it myself;
C) Have the customers do it. (For instance, instead of having an employee to get drinks for customers, move the soda fountain to the customer area, give the customer an empty cup, and have the customer fill his own cups.)

david nieporent: “These sorts of arguments are wrong, because they mistakenly assume that (a) all jobs must be done, and (b) all jobs must be done by employees. Neither is the case.”

I think most of us understand that as wages rise, production is reorganized.

The deep question, here, though, is whether raising the minimum wage will result in an increase in unemployment. Not whether some job will go undone, because it is not worth doing at the minimum wage, but whether some person will go unemployed, because there’s no job she can do, which is worth the minimum wage.

“it’s that there’s more need for liberals to be passionate about the minimum wage, because of the greater pushback against the minimum wage.”

Matt, when I said this was “an ideological battleground” I wasn’t blaming just leftists, or pro-min-wage folks. Certainly folks on the other side invest way too much time on it as well. So you’re right, but if you’re like me – who on the whole thinks raising min wages is a bad idea, but not horrible bad since the disemployment effects are likely to be small – then all this passion spend on what is at best a fairly ineffectual way of helping the working poor seems like so much wasted energy. And hey, I’m an economists, waste bad! So I want to reallocate the passion that is being wasted into something that’s actually productive. Like the EITC. So I agree with your 3rd paragraph in 57 and the follow up posts.

notsneaky — thanks for the response there. I think we have to look not just at passion allocations but at how an input of passion produces and output of results. Someone might reasonably think that, even though the EITC is more useful than the minimum wage, it takes less allocation of passion to raise the EITC than to raise the minimum wage. As can perhaps be seen by the fact that the EITC has continued to go up even given a relative absence of passion, whereas all the passion that has been spent on the minimum wage didn’t produce a rise in the min. wage between 1996 and 2007 or so. In which case it makes sense to spend more passion on the minimum wage, since it takes more passion to get anything done.

Of course for this model to work we have to assume that the passion-to-result functions are nonlinear, and in particular, that reallocating all our passion to the EITC won’t result in a proportionately higher EITC; but I think that case is easy to make. In fact the function is pretty clearly going to be discontinuous, since below a certain minimum threshold you get no increase in the minimum wage, and above that threshold you get a discrete increase.

Erm, all the attempt at economics jargon in there is obviously tongue-in-cheek, but I think it may make sense to talk more about the minimum wage even if the EITC is in some way more effective; of course if you think that the minimum wage isn’t effective at all then the passion is entirely wasted, but many people on this thread do think it’s somewhat effective.

Oh, and thanks also for the point about simplifying the EITC — the problem there is that I think the simplifications might be difficult to pass politically. For instance, in the piece I linked in 59 John Alexander Burton suggests “a unified credit for which the working poor would be eligible without regard to the number of children they have”; which seems like a good idea, but it’s generally much easier to pass things like this in the U.S. when you can pitch them as “for the children.” Which is unfortunate.

The fraction of the working population that makes exactly minimum wage is kinda small…but at the low end, a lot of salaries are pegged (formally or just in practice) as minimum wage plus some amount. I thought I remembered seeing a good tally of how many businesses do that, but couldn’t find it in a search this morning.

“The EITC would work well if there was steep progressive taxation. Otherwise, taking from the guy who just managed to pull himself out of poverty and giving to the guy who is still in poverty doesn’t seem like a brilliant solution to anything.”

Yeah, but that’s pretty much what the minimum wage does too. To the extent that the tax system is progressive (and certainly those “who just managed to pull themselves out of poverty” DON’T pay taxes (except maybe Social Security but that’s another can of worms)) the EITC is a better option.

As far as the effects of minimum wages on inflation. Ok, so suppose the firms pass on the entire increase in wages to consumer. But this means that now consumers have less to spend on other goods (assuming they don’t change their consumption of the minimum-wage-produced good, which is pretty much implied by inelastic demand/the fact that firms can pass this wage increase). So demand for other goods falls, so prices of other goods fall (it’s a bit more complicated but that’s the jist), offsetting, in the overall price index, the rise in the price of the minimum-wage-produced good. Is it gonna fully offset it? No, as long as the minimum wage produces some unemployment (and hence output), either in the original industry or in some spillover industry.

In this case the increase in minimum wage pretty much works the same as an “oil shock” in standard macro. Of course the big difference being that in an economy like the US the minimum wage industry is nowhere near as important as oil so it’s effects on the macro level will be small. But you look at a country where a good portion of the economy is affected by minimum wage laws, then yeah, you’ll see some of that show up as a price increase (though not inflation, since as we know that’s always and everywhere a monetary phenomenon). Mexico in the 1990’s, Puerto Rico in the … 70’s, 80’s??? when the US mainland minimum wage was applied there for a short time, maybe even France today (though doubtful).

If this is a stupid question, I apologize in advance.
When I was a lad, right-wingers often used the example of the then nearly extinct grocery store bag boy (yes, he was a “boy” in those days) to prove the horror of minimum wage laws. That was about 40 years ago. In the last decade or so, despite increases in the minimum wage, the bag-person has come back to at least many of the larger grocery stores. I can’t imagine that providing bag-person service adds more revenue than it used to. So why are the baggers back?
It occurred to me that, despite raises over time, the real value of the minimum wage now is still well below what it was when grocery store owners began to stop providing baggers. If the real value of the minimum wage rises to, say, 1968 levels, will the baggers disappear again?

Matt, nah, that’s pretty good in terms of the economics jargon and it makes sense. So what you’re saying is that the battle on the EITC has been essentially won so it makes sense to focus on the Min Wage. But this isn’t actually like a production function, rather it’s like game theory. So the output depends not just on your input of passion but also on the input of passion by your adversaries. And here both sides seem to be stuck in a Prisoner’s Dilemma pushing at the min wage from two sides and as a result in the final outcome it doesn’t budge much but passions have been expanded. But if one or two sides switched their passions to pushing up the EITC a lot more could be done a lot more quickly for a lot more folks.

(Actually, it’s only a Prisoner’s Dilemma if you have ideological capital at stake. If all you care about is helping the working poor, ideology be damned, then arguing for min wage increases, given that your opponents are going to adam-ant-ly oppose them is just simply a non-optimal strategy)

Also, there’s probably diminishing returns to passssssion and since so much of it is already allocated to min wages it means that that marginal product of passion is pretty close to zero there.

There are tasks that are worth $X to a business but not $X+1. If you force me to pay an employee $X+1, I will either:

A) Forego the task entirely;
B) Do it myself;
C) Have the customers do it. (For instance, instead of having an employee to get drinks for customers, move the soda fountain to the customer area, give the customer an empty cup, and have the customer fill his own cups.)

#11, what a crock! You said “For example, you can’t pay your employee less than it’s necessary to survive, physically survive. So, there is a natural minimum.” Wrong! What is necessary to “physically survive”? $1 a hour, day? It depends on the circumstances. People used to take inter jobs at no pay, for the experience. If your spouse/parents work, you don’t need much/any money to survive. That is what is good about the free-market, it will usually find equilibrium on its own, if left to its own devices without government intervention. If the job is ONLY worth $2 an hour to an employer one of the following three things will happen, 1) they will find enough labor at $2 an hour to produce their products or 2) they will not find enough labor and will not be able to product their products (go out of business) or 3) not find enough labor and as a result need to increase both their labor rate and their product rate to be able to produce a product that they could sell while hiring the labor they need.

This “living wage” moniker and a fallacy hosted on the populous by those with their own agenda and it is not protecting workers.

“There I read that the firm’s problem is to choose a level of employment, n, so as to maximise pf(n)-wn where w and p are given constants. That doesn’t make a whole lot of sense if the firm can cut w by a penny without the entire workforce downing tools.”

Right! So in the standardest of standard models this “cut a wage by a penny” doesn’t even come up because firms are assumed to take wages as given. The wage is determined by the market. So it doesn’t make sense to say that “all workers would quit” in such a model because one firm cutting wages by one cent is just not in the menu of option that a firm has. Unrealistic? Sure. But it’s a model.

You could go to a Bertrand-style model of the labor market where firms post wage offers and workers decide which firm to work for, if at all. But then the proposition that “if one firm cuts wages by one cent all workers will quit” just means that in equilibrium identical firms would pay identical wages. Which, uh, sort of makes sense. Are firms in the real world all identical? Of course not. It’s a model.

So you could have differentiated firms. There’s two ways to go here. One is the whole “compensating differential” literature which pretty much retains the perfect competition assumption but which essentially says that “wages” should be adjusted for working conditions when comparing them (still cranked out by the market) or something like the differentiated Bertrand model – which is pretty much where you wind up with some oligopsony and them search models. But even here, while you can have a wide dispersion of wages, they’re all equilibrium wages which means that if some firm deviates from them they will loose all their workers.
So this is just a feature of the fact that we’re looking at this question WITH MODELS (btw, I’m not shouting, I’m emphasizing) and it’s not really that important. It’s like saying that the map of US is wrong because Nevada isn’t really color magenta.

First of all the ripple effect. You raise the minimum wage and a whole bunch of people on the low end get a bump too. Flattens the income distribution.

And also, and probably more importantly, it creates incentives for technological (and organizational) progress: self-cleaning toilets, dish-washing machines, strawberry-picking machines, etc. And innovation, increased productivity is, in the end, what this is all about. The EITC doesn’t do that; in this sense it’s an obstacle to the progress.

With no method in their madness, just pride about their manner? Urging us to throw our safety net overboard and join their insect nation? Explaining that there is nothing like the sound of a nicely laundered pound and trying to collect around forty million?

So in the standardest of standard models this “cut a wage by a penny” doesn’t even come up because firms are assumed to take wages as given. The wage is determined by the market. So it doesn’t make sense to say that “all workers would quit” in such a model because one firm cutting wages by one cent is just not in the menu of option that a firm has.

Of course, another way of saying “it’s not an option a firm has”–or rather, a way of explaining why “it’s not an option a firm has”–is that, if a firm does it, all the workers would quit. It’s not physically impossible to offer a less than market price for a good you want to buy; it just means that, in a market functioning according to the model, no one will sell to you.

notsneaky: “So this is just a feature of the fact that we’re looking at this question WITH MODELS (btw, I’m not shouting, I’m emphasizing) and it’s not really that important. It’s like saying that the map of US is wrong because Nevada isn’t really color magenta.”

Something, sometime is a feature of the model, and not just the fact of a model. On a political map of the U.S., coloring Nevada magenta may be no big deal; on a topographical map, it is a curious choice, and in the case of aerial photogragh, downright, odd.

#92, how does an employer force an employee to give them money? The employee is not a slave and is free to no longer work for the employer whenever they so choose.

I oppose any mandated minimum wage because it in effect tells a business what their employees are worth without a clue as to the position or the employee. Due to local markets and available labor, the job may only be worth $2 per hour or it may be worth $20. Only the business and the local labor pool really know. When left alone, the local labor pool will work it out and a real price for labor and the resulting goods will be reached.

This is the same reason I am opposed to illegal aliens in the work force. Most illegal aliens are paid off the books and are paid minimum wage or less. Paying them off the books even when it is minimum wage is still a cost reduction to the business as they do not have the payroll taxes figured in and as a result can charge less for their products or services than the competition, gaining an unfair advantage.

Both of these (minimum wage requirements and illegal workers) mask the real cost or value of services and goods. Illegal aliens depress the price unfairly and minimum wage requirements inflate it across the board impacting all consumers.

As a side note; “minimum wage” jobs are not usually intended as long term positions for workers. They are introductory jobs. Someone that is working full time and receiving minimum wage for years is someone that is happy making minimum wage. Yes there are exceptions to everything but generally speaking minimum wage is not a career and anyone turning it into one is where they want to be. I would feel rather safe in saying that no one reading or posting on this blog that has been out of school for more that a couple of years is earning minimum wage and if they are the question is why? What have you done to earn more than minimum wage? I am in my mid-40s, do not yet have a degree but have not had a minimum wage job since I was 16 years old. There are jobs and money aplenty for those willing to look and work for it.

The more money I make, the more able I am to absorb incidental costs (health, transportation, etc.) and prevent them from interfering with my work. Plus, whenever my income crosses a certain point, I reach a psychological equilibrium that increases my productivity in all areas of life, including work.

There’s also loyalty, the feedback effect to self-image of being valued, etc., etc.

I would guess that my personal value to an employer *per dollar of wages* is an upside-down horseshoe curve—once wages are high enough to create a sense of employment (“Penny for your thoughts” doesn’t actually trigger a “this is my job” incentive) my value per dollar rises steeply, rises gradually, levels, falls gradually, then falls steeply. I *suspect* that it never falls so far that paying me more reduces my total value to an employer, but I don’t know. Maybe at some point I’d get arrogant, clueless, and self-absorbed. Anyway, the point is, there’s a real sense in which people can pay *me* more and get a better economic bargain thereby. And I’d say that this is typical; or at least, that calling it typical is believable enough to compete with the fixed-value-of-a-worker idea as an a priori hypothesis.

It’s possible that businesses already set wages to take this kind of thing into account, but if we’re going to assume that managers are aware of phenomena that are vastly under-expressed in this culture (“higher wages can create increased value, rather than just being a reaction to it”) then we might as well also assume that any minimum wage Congress sets will be the value that maximizes the country’s economic health.

“There is a minimum feasible crew for a fast food restaurant, which is not elastic. Fewer workers than that, and the restaurant has to close. It’s not realistic to try to reduce the crew past that point.”
Lets say we increase the minimum wage to $20.00/hour. I suspect that many fast food resturants would, in fact, close because the price they would have to charge for their product would be so high that many customers would eat at home instead. So the much higher minimum wage would, in fact, cause a reduction in people working in the fast food industry even if there is a minimum number of people needed to run the resturant. However, there are many other alternatives to closing entirely. These would include: 1) Hiring harder working and more efficient workers who become available at the higher wage (not difficult to imagine if you have been to a minimum wage establishment); 2) providing poorer services (e.g. longer lines); 3) cutting back open hours; 4) using more efficient technology; 5) reducing non-monetary benefits such as working conditions, vacation and sick leave.
On the underlying issue being discussed here, I don’t think that any rationale person would argue that low-end labor markets are perfectly competitive. However, it is quite a stretch to argue that because they are not perfectly competitive, they are more accurately described by a monopsony model. Certainly, empirical studies that small increases in miminum wages do not increase unemployment do not prove the monopsony model is a better fit for the labor market.

Kathy isn’t objecting to the use of models; she says: “all models are stylized and radically simplified representations of reality, and leave out many features that are very important in the real world. Still, some models are better than others at getting the basics right.” (Emphasis mine) She particularly dislikes “the perfect competition model [which] makes a number of very strong, and highly implausible, assumptions. It assumes that employers don’t set wages, for one thing….”

Megan McArdle evidently thinks that’s a trivial complaint. I fear you are encouraging her in that delusion. Leon Walras and FY Edgeworth didn’t think it was trivial at all. Saying that “the wage is determined by the market” is a cop-out. You undoubtedly know this (and in saying that I don’t mean to imply that you were trying to pull a fast one when you wrote those words), but there may be readers out there who haven’t thought about it. If everyone is a price-taker, who informs them of the price? Walras “solved” this problem by introducing an auctioneer (more like a god really) into his model; Edgeworth devised his recontracting gimmick. At least they tried. Most people who invoke the perfectly competitive model don’t even notice the problem. Anyway it seems to me that Kathy has a point here: it is a strength of a monopsonistic model that it faces the issue.

I wouldn’t see this as a big deal in a discussion about asset markets. There it’s easy to see how the prices are arrived at. Also I’m sure the competitive model works well enough for markets in fruit and vegetables. But if economists understand how wages are set they have certainly managed to keep the secret from me. And if they don’t understand, then they should be more appreciative of guys like Card.

My eyes may have glazed over there for a moment, so I may have missed someone else making the point. The last time the federal minimum wage was increased in the U.S. its purchasing power had declined by something like 17% since its previous adjustment. Did the most recent increase make all of that up?

The point is that “raising the minimum wage” attracts a lot more attention than its steady decline over time. Has anyone studied what effect the steadily diminishing buying power of the minimum wage has on employment over time?

I have pointed out that the Econ 101 model on minimum wages is logically invalid. “NotSneaky” replies with a non-sequitur: “Please offer, just once, some empirical evidence that reswitching and capital reversing is AT ALL RELEVANT to the industry affected by minimum wages.” I am under no obligation to produce empirical evidence that 2 + 2 does not equal 3. Furthermore, “NotSneaky” knows very well that empirical evidence exists on this topic. The last time he was offered such, he put forward his ignorance of and inability to access the literature as a pretend argument. But ignorance is not an argument. (I don’t expect anybody publishing in the AEA to cite me – or the economists on which I draw – anytime soon.)

I think Kevin Donoghue’s remark about Walras is interesting. As Frank Hahn has emphasized, the Econ 101 story about minimum wages isn’t valid in the Arrow-Debreu model either.

Speaking of which, I think some are only pretending that participants in this conversation are pursuing truth with goodwill to all their brothers and sisters. (By “this conversation”, I do not mean to confine myself necessarily to Crooked Timber or even the blogosphere). Groucho – or was it one of his brothers? – had a point about “Vulgar political economy.”

I see no reason why any body should care what Tim Worstall says “convinces” him or what arguments he says he does not or does not “accept”.

“I have pointed out that the Econ 101 model on minimum wages is logically invalid.”

You keep saying that but it’s just not true. It’s different assumptions – the simplifying assumption that capital is homogenous. Especially when you’re talking on the industry level.

“I am under no obligation to produce empirical evidence”

Look, even with the linear production model, circulating capital and all that stuff, reswitching and capital reversing is not GUARANTEED to exist. And if they don’t then there’s little difference between your favorite model and the standard model in terms of how employment responds to minimum wages. The story in a general equilibrium model, linear or AD is potentially different, but seriously, for the US it makes perfect sense to consider the effects in a partial equilibrium model.

“knows very well that empirical evidence exists on this topic. The last time he was offered such, he put forward his ignorance of and inability to access the literature as a pretend argument.”

Well, except it doesn’t. Last time this came up I pointed out that 1 paper found evidence of Wicksell effects in 3% of cases (which isn’t very encouraging), one was mostly irrelevant (because it was about whether or not pf exist not whether Wicksell effects are relevant, and it was a simulation, not an empirical paper to boot), then there was Barkley’s paper which argued that reswitching might have occured at one point in a particular mining industry (if I remember correctly) and then I could not access the remaining one or two papers.
So why you misrepresenting what happened? Just because I was unable to access SOME of the papers doesn’t mean that I pleaded ignorance or inability to access.
And everytime I keep asking you for evidence that Wicksell effects are relevant to real life economies you dodge this question by first insisting that because the neoclassical model is “invalid” (which it ain’t) you don’t have to produce anything and then offering some barely-relevant papers (except for Barkley’s paper) or papers which actually support my view that Wicksell effects are essentially a Yeti – a creature which some claim to have seen but for which there’s basically no strong empirical evidence for.

Raising the minimum wage does cause lower employment. The classic example is near the border of Eastern Washington, with a very high minimum wage, and Idaho, with a low minimum wage. Washington’s high minimum wage has drawn workers from Idaho. They now have more money, and they tend to spend it where they work, in Eastern Washington, helping the local businesses. The Idaho employers whine about this, but not being familiar with capitalism, they’d rather bitch and do less business than raise pay.

A high minimum wage is sound economic policy. It discourages employers from substituting labor for capital. For example, Australia has high labor costs, so they use machines to cut sugar cane. We Americans use manual labor. When black labor was cheap, before World War II, Americans cut cotton by hand, now they use machines. In India, poorly paid women haul gravel, dirt and concrete to constructions sites on their head. In Korea, they use trucks and tractors. Replacing people with machines and eliminating jobs by rethinking the means of production is at the heart of capitalism’s success. When labor is cheap, capitalism stops growing. A high minimum wage is just as important to capitalism as a police force and system of law.

NotSneaky writes: “Wicksell effects are essentially a Yeti”. This is confused. I suppose NotSneaky means “Positive real Wicksell effects”. And he points out instances of such in his post, not that he is reliable on those references anyways.

For example, it is confused to dismiss Zambelli on the grounds that his simulation investigates the existence of production functions. Zambelli finds that in 60% of his randomly generated economies, real Wicksell effects are sometimes positive. (The chances of reswitching occuring are a lot less, though they increase with the number of commodities. But reswitching is not necessary for capital-reversing.)

To continue, this sort of is possible in an economy with one capital good in which that capital good simultaneously is the one consumer good. At least, Ian Steedman argues so (Cambridge Journal of Economics, V. 18, N. 3 (1994): 299-311). I suppose one could argue the capital good is not homogeneous since the capital goods is distinguished by how old it is.

Anyways, the textbook assumptions are supposed to yield a model of supply and demand in the labor market in which a minimum wage causes unemployment. I present examples in which all the assumptions are met and a higher externally-imposed real wage results in more employment. Thus the textbook model is logically invalid. (Its nonsensical nature can perhaps be seen by trying to find a clear statement of assumptions in microeconomics textbooks.)

So now the argument has become a high minimum wage is a good idea because it does decrease the employment of labour?

Increase in productivity doesn’t necessarily translate into decrease in total employment. I think I read somewhere that in the 1960s (or 70s) the number of bank tellers in the US was projected to grow exponentially until every single resident would have to become a bank teller. But then ATMs were introduced, became common and destroyed millions of potential bank-teller jobs. Still, some people somehow manage to find employment…

As an economist, I find it astonishing that members of my profession can believe that real per capita output has tripled over the past fifty years while the real hourly minimum wage is essentially unchanged over the same period, but raising the minimum wage will cost a substantial number of jobs. How divorced from basic reality can you possibly be? Why not just believe in Santa Claus and be done with it?

I understand people don’t want to get too icky with numbers and citations in a comment thread, but in the realm of empirical evidence that the EITC subsidizes employers, there isn’t much. Naturally there is some subsidy, but indications are that the bulk of the benefit goes to the worker.

I see some on the left repeating this because they find it hard to believe a gov measure could be helpful to the working class, and when I challenge them for evidence rather than their (semi)logical arguments, they have nothing but end up repeating the same thing later on.

Max, obviously it does subsidize employers when it serves as the alternative to raising the minimum wage, especially in a near-flat tax environment. How is this semi-logical and what evidence do you need?

One factor missing from simplistic models is worker productivity. A minimum wage requires employers to make a minimal investment in worker training and providing tools to allow the worker to be productive enough to cover the wage cost.

(117) The kind of evidence where Sally is making $13K a year, an EITC benefit of $3,500 gets enacted, and then lo and behold she is bringing home $16K a year. I would say then she has gotten $3K in benefits, her boss the other $500.

With considerably more effort, complexity, and data, that’s what the empirical research shows.

Suppose I own a sweatshop – a bunch of sewing machine operators, I pay them $.5/hour; I have some managers and security guards: $10/hr and some mechanics: $15/hr. I make good profits. No taxes, no government, no nothing.

Time goes by and little by little it becomes impossible to survive on $.5/hour; just not enough for the basic necessities anymore. What to do, what to do? Here’s what I do: I call my managers, security guards and mechanics and I tell them: look at these poor women working sewing machines 16 hours a day – all this work and they can’t even afford to sleep indoors. That’s a disgrace, we can’t let this go on like that. Starting today I’m going to deduct 10% from each of your paycheck and distribute it among the women – agreed? Sure, everyone wants to help the poor women. Great, problem solved, now I can go back to the Bahamas.

Now, this is, obviously, an ugly caricature, reductio ad absurdum of the EITC idea, I understand it. Nevertheless, according to your logic (if I understood it correctly), there is no subsidy to the owner here, exactly 0 subsidy – correct?

I am one of those black-hearted liberals, who object to the EITC “as an alternative to raising the minimum wage”, but I don’t object to the EITC, per se. And, the reason is that, in the absence of reasonable minimum wage, I fear that the EITC becomes a subsidy for low-productivity jobs and the parasitic employers who feed on low-productivity jobs.

The thing about low-productivity jobs created by “parasitic employers” …

(this sort shows you don’t know the fast food industry very well. I don’t know about now but about 10 yrs ago an owner of a BK franchise made about 35K a year and put in some serious hours. Granted this was in the South so prolly below national average. But margins are really tight as it is a very competitive business)

…is that the reason they exist is because there are low-productivity people out there (hey I know, I was one of’em). It’s great when the “economy creates high-skilled jobs” …

(here the kudos being given to an abstraction called “the economy” rather to any, potentially “parasitic” employer)

…that some lawyer or doctor or engineer can take but that don’t do nothing for some guy who dropped out of high school at 16. I remember during the middle of the Clinton boom Ralph Nader sneering about how lots of the jobs being created were “low skill low paying jobs” and thinking “well, schmucko, that’s the only kind of job I gots the qualifications for right now”. If “the economy” “creates” low skilled jobs that means that somebody without a high school degree who was unemployed before now is employed (often this person being a teenager).

Given that the education system has failed some people (see the other CT post) the fact “the economy” or “parasitic employers” or whoever creates job that don’t require a lot of education is a good thing.

abb — In your example the boss is no better off after redistributing his wages, so I see no subsidy to him. Nor does it make sense that after this redistribution, his former untenable status has changed, except for his ethical concerns. It is true that in a macro sense, the EITC is subsidized by the tax system, which is spread over individual income tax payers (mostly above the median in the U.S., by the way).

bruce — not hard to understand. But that is different than a flat statement that the EITC is a subsidy to low-wage employers, which was the assertion floating around that I was referring to. I don’t believe there is any empirical evidence for your fear either, but that is a different matter.

Of course the boss is better off: he couldn’t continue paying low wages, his employees would’ve literally died. Now he can. Why? Because a bunch of people volunteered to give their money to increase his employees income, or, in other words, to pay a portion of his employees wages. How is this not a subsidy? If I’m paying a quarter of your gardener’s salary, am I not subsidizing you?